Mark Carney Braces for Guidance Grilling on BOE Rates

While Bank of England Governor Mark Carney is sticking to the view that any increases will be “gradual,” his surprise comments in the Mansion House speech on June 12 prompted a huge shift in bets on the timing of the first tightening. Photographer: Simon Dawson/Bloomberg

June 23 (Bloomberg) -- Mark Carney will get a chance this
week to explain what happened to forward guidance.

Just weeks after entrenching investor expectations on
record-low interest rates, the Bank of England governor warned
borrowing costs may rise earlier than anticipated. His change of
tone will probably feature at questioning when he appears before
lawmakers tomorrow.

“Carney has a massive communication problem because I
think it’s just flip-flopping around,” said Brian Hilliard, an
economist at Societe Generale SA in London and a former BOE
official. “We get very strong signals from the BOE and they
become meaningless a month later.”

At risk is Carney’s credibility as his plans to keep
interest rates low run up against a strengthening recovery
that’s put Britain at the vanguard of the Group of Seven
nations. While the governor is sticking to the view that any
increases will be “gradual,” his surprise comments in the
Mansion House speech on June 12 prompted a huge shift in bets on
the timing of the first tightening.

Carney will speak to Parliament’s Treasury Committee at a
public meeting to grill policy makers about their quarterly
Inflation Report, and he will brief journalists on the BOE’s
financial stability report two days later. Among lawmakers on
the panel is Conservative Jesse Norman, who questioned last week
whether forward guidance is still a relevant policy.

“Where’s the substance?” Norman said on June 18. “All it
really amounts to is a lot of arm waving until the governor
tells us when he thinks rates are going to go up or down.”

Shifting View

In May, the BOE’s Monetary Policy Committee said inflation
would probably stay close to its 2 percent target over the next
three years, based on expectations for a rate increase in the
second quarter of 2015. Four weeks later, Carney said the MPC
could move “sooner than markets currently expect.”

The shifting position was reinforced last week, when the
MPC said in the minutes of its June meeting that it was
“surprising” that investors were putting such a low
probability on a rate hike this year. The BOE has held its
benchmark rate at 0.5 percent since March 2009.

The pound surged 1.6 percent versus the dollar this month,
as the prospect of higher rates boosted its allure. Sterling
rose to $1.7063 on June 19, the strongest level since October
2008, and was at $1.7021 at 10:40 a.m. London time.

‘Debating Point’

Policy maker David Miles wrote in today’s Telegraph
newspaper that it’s now “much more likely” rates will start to
return to normal before his term on the MPC ends May 31. It’s a
contrast from comments made in February, when he said “it may
be that sometime next year may be the right time, but it’s
difficult to predict.”

The change of view is “obviously going to be a key
debating point of the Treasury Select Committee,” said George
Buckley, an economist at Deutsche Bank AG in London. “How -- in
terms of communication -- you’ve gone from the position where
the MPC has been giving very dovish signals, to one where they
are giving much less dovish signals.”

Societe Generale’s Hilliard, along with economists at
Barclays Plc, Credit Suisse Group AG and Royal Bank of Scotland
Group Plc, were among those who brought their rate forecasts
forward after Carney’s comments. The implied yield on short-sterling futures contracts expiring in December rose to 0.90
percent at the end of last week, compared with 0.72 percent on
May 30.

Guidance Evolves

Under the first phase of guidance, which Carney introduced
one month after he took office last July, the BOE said it
wouldn’t raise rates at least until unemployment declined to 7
percent, something it didn’t see happening until 2016 at the
time. In February, officials were forced to redraft the policy
after joblessness fell far faster than anticipated, changing the
focus to spare capacity in the economy.

“Guidance was designed for a certain set of circumstances,
which have now changed,” said Stuart Green, an economist at
Santander SA in London. “The market isn’t questioning their
credibility just yet, but there are implications. If the bank
was wrong in the first place, then why should they be believed
now?”

Britain’s economy expanded 0.8 percent in the first quarter
and is set to maintain that pace in the second quarter. While
inflation is below the BOE’s 2 percent target, continued
economic strengthening could reduce the amount of slack faster
than forecast, raising the prospect of increased price
pressures.

For David Tinsley at BNP Paribas SA in London, the recent
adjustment within the MPC may just be the start, with the next
shift possibly centering on the speed of rate increases.

“There is a clear risk that the MPC will eventually need
to change its tune, again, on the speed and degree of tightening
that the economy will need,” he said.